Time to read the BOE’s tea leaves on rate hikes

Remember the Bank of England? You know, the other big European central bank?

For a long, long time, the ECB — with its lack of action and then its lots of action — has eclipsed its fellow monetary-policy makers. But this week, all that will change.

The BOE is back — and it’s rapidly getting into position to become the first of the central-bank heavyweights to hike interest rates. On Wednesday, we’ll get a look at the minutes from its last rate-setting meeting, on June 5. While that was a non-event, as policy makers did their usual thing of making no changes, the report may still turn out to be exciting reading.

Why’s that? Because of the bombshell BOE Gov. Mark Carney dropped last week.

Unlike the ECB, the BOE isn’t dealing with an economy in divergence and disarray: The U.K. is enjoying a steady decline in unemployment, solid growth and well-controlled inflation rates. That rapid economic recovery spurred calls for a rate hike, but the BOE looked set to ignore these and carry on in emergency mode well into 2015.

Then Carney spoke. “There’s already great speculation about the exact timing of the first rate hike, and this decision is becoming more balanced. It could happen sooner than markets currently expect,” he bluntly told an audience of top bankers.

That comment not only surprised the markets (the pound rallied, the FTSE 100 dropped), but also triggered a wave of new rate-hike forecasts. Economists from several banks now see the first increase happening by the end of this year.

The June meeting minutes should shed light on who on the Monetary Policy Committee agrees with the move. Plus, there’s more on that in the video at the top of the story.

Reuters

BOE Governor Mark Carney

Bank of England minutes: One question still hovers over the City in London, though: When will the BOE actually lift the rate from its record of low 0.5%?

After all, it’s been at that level since March 2009, when the bank slashed rates to fend off fears the recession would turn into a 1930s-style slump.

The BOE minutes from May showed that some Monetary Policy Committee members think the interest-rate debate has become “more balanced”. Translation: There are more signs the economy’s on the upturn.

That MPC debate is likely to only intensify as the recovery continues to gain steam, according to Victoria Clarke, economist at Investec Securities.

“Indeed, the recent U.K. jobs report is one example of evidence that is likely to spark further ‘tightening’ debate, with it having pointed to a broad improvement in the health of the U.K. labor market and reducing spare capacity,” Clarke said in a note.

That said, Clarke and most other economists expect the nine MPC members to have voted unanimously in favor of keeping rates low and making no changes to the 375-billion-pound ($636 billion) asset-purchase program. The minutes come out at 9:30 a.m. in London (4:30 a.m. Eastern Time) on Wednesday.

U.K. inflation data:One report the BOE is likely keeping a weather eye on. Annual inflation rose to 1.8% in April, from 1.6% in March, mainly due to the “Easter” effect that pushed travel costs higher.

That should partly be reversed in May, with the headline inflation number forecast to slip to 1.7%. As Investec’s Clarke notes, the data should help to “reassure that current price trends are well contained, despite the building economic recovery.” The numbers come out on Tuesday at 9:30 a.m. in London.

Euro-zone inflation data: For a while, this was THE data to watch in Europe. But earlier in June, the ECB finally took action, introducing negative deposit rates and quite a big package of liquidity measures. That means it’s not the make-or-break report it once was.

Nevertheless, low inflation is still a major concern for the euro zone, and final May figures out on Monday confirmed that picture. Eurostat said consumer prices rose 0.5% last month year-over-year, the lowest level since late 2009 and in line with an earlier estimate.

Eurogroup meeting: Euro-zone finance ministers meet once again on Thursday and although it’s not entirely clear what will top the agenda, it’s fair to expect a discussion on Greece. The International Monetary Fund — one of Greece’s international lenders — warned last week the country needs to improve its public-sector efficiency dramatically, to meet new fiscal targets and avoid fresh austerity measures. The IMF also identified a €12.6 billion ($17 billion) gap in funding.

Ending SMP drain: Some observers have called this action “mini-QE”, because it will instantly release more than €100 billion in additional liquidity.

The ECB has decided to end the sterilization of its Securities Market Program, a move revealed in the bank’s stimulus package earlier in June. The SMP “drain” is a complicated mechanism, but essentially, it pulls euros from the region’s financial system. (For a more detailed explanation, see The Wall Street Journal’s “What does the ECB’s ‘sterilization’ program do?” )

This week, the central bank plans to end this drain, effectively sloshing a large, extra amount of liquidity into the system. As a result, economists argue, the euro
/quotes/zigman/4867933/realtime/sampledEURUSD could come under more pressure. On Monday, the shared currency was already trading close to a four-month low.

FOMC meeting: Another central-bank highlight. The U.S. Federal Reserve is expected to stay on tapering autopilot and slash another $10 billion from its QE program, bringing the monthly amount of asset purchases down to $35 billion. If the Fed sticks at that pace, its easing could end in October with a final cut of $15 billion, analysts at HSBC noted.

Recently, though, it’s the prospect of the Fed’s first rate hike that’s been occupying minds. So expect investors to keep close watch on this week’s updated economic projections from the Federal Open Market Committee and the “dots” that reflect the individual members’ view on the rate path. Read: Markets to Fed: Give us the ‘dot plot’ and go home

The FOMC decision comes out at 2 p.m. Eastern Time on Wednesday.

Earnings: Among earnings highlights, Swedish retail giant Hennes & Mauritz
/quotes/zigman/177851/realtimeSE:HMB reports first-half results on Wednesday. Sales in the second quarter have been stronger than in the beginning of the year, raising hopes that earnings have improved alongside.

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